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Thursday, July 20, 2006

Tech Spending Looks Blah

By William Trent, CFA of Stock Market Beat

With the consumer showing clear signs of a slowdown, all eyes are on business spending and the long-awaited passing of the baton. Based on early earnings reports in the tech sector, it looks more likely that the baton will be dropped. While Apple posted great growth, they are a special case. The large tech companies and distributors are posting mid-single digit growth at best, in line with GDP and hardly sufficient cause for excitement.

Watch List company IBM posted revenue gains that were as meager as you can get. From their conference call:
Without PCs in 2005 IBM revenue was up 1%, our pre-tax income was $2.9 billion, up 6% over second quarter of last year, and we delivered $1.30 of earnings per share which was 14% improvement over last year’s second quarter.

They said business is slowing significantly, or in CEO-speak “We saw sales and contract cycles elongate in June.”

The weakness was global:
The Americas revenue increased 2% year-to-year supported by growth in all regions. Growth was led by software, offset by declines in mid range servers and storage. Europe revenue declined 1%. As always, resultswere mixed by country. France and Spain again showed solid growth but Germany, Italy and the U.K. declined. Asia Pacific revenue declined 3% this quarter. Representing over half of the Asia Pacific revenue base, Japan declined as we continued to work through our operating issues.

Particularly hard hit was the consulting business, where billings declined modestly but bookings (the indicator of future revenue) were off significantly. Although bookings can fluctuate widely from quarter to quarter, it is hard to paint this in a good light.

Global Services delivered revenue of $11.9 billion, down 1% year-to-year. Signings for services this quarter were $9.6 billion at constant currency, down 34% against a very challenging compare.

Furthermore, they made it clear that it was an industry slowdown rather than company-specific share loss:
We didn’t see those deals – we didn’t lose them to competition. But they did generally roll.
Where the company did manage to grow was in areas such as blade servers that make things significantly cheaper for their customers. While it is important for them to cannibalize their growth rather than allow others to do it, it is a sign of the capital spending environment that CIOs continue to do more with less.

The slowdown was echoed by tech reseller CDW Corporation (CDWC), which is not on the Watch List but is a company we have discussed several times due to their value as a signal for overall tech spending. Total revenue was 1.6 billion in the second quarter compared to 1.5 billion a year ago, up 6.1%. Again, it is cost that is driving unit sales, according to their conference call.

Continuing the recent trend, average selling prices of large format LCD monitors have declined significantly year over year. The more affordable prices have driven unit volume.
Small comfort to the panel makers.

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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